Rural Development Utilities Programs

1. Rural Development Utilities Programs KENNETH M. ACKERMAN Assistant Administrator, Program Accounting and Regulatory Analysis NARUC Staff Subcommittee on Accounting and Finance Salt Lake City, Utah September 19, 2005

2. Topics Personnel Changes Electric Program Telecommunications Program Water & Environmental Program Accounting Issues Other Issues

3. Administrator - RUS The President announced on August 25, 2005 his intention to nominate James M. �Jim� Andrew as the new Administrator of the Rural Utilities Service

4. Staff Changes Deputy Assistant Administrator � Electric, Nivin Elgohary Chief, Northern Regional Accounting Branch, Randy M. Allen Field Accountant � New England, New York & Pennsylvania, Tim Frantz

5. Electric Programs Budget (Dollars in Million)

6. RUS BOX SCORE Hardship Loans As of 8/31/2005 FY Authority ��� $119,040,000 Approved (11) ��.. $ 77,302,000 Remaining ����. $ 41,738,000 Applications Pending (3) $ 41,738,000

7. RUS BOX SCORE Municipal Rate Loans As of 8/31/2005 FY Authority ��� $ 103,608,888 Approved (10) ��.. $ 56,593,000 Remaining ���� $ 47,015,888 Applications Pending (8) $ 43,482,000

8. RUS BOX SCORE Treasury Rate Loans As of 8/31/2005 FY Authority ��� $1,000,000,000 Approved (37) ��.. $ 763,050,000 Remaining ����. $ 236,950,000 Applications Pending (14) $ 422,593,000

9. RUS BOX SCORE Loan Guarantees As of 8/31/2005 FY Authority ��� $2,100,000,000 Approved (25) ��.. $1,729,820,400 Remaining ����. $ 370,179,600 Applications Pending (32) $ 6,557,298,600

10. Note Guarantee The Rural Utilities Service has signed a $1 billion note guarantee agreement with the National Rural Utilities Cooperative Finance Corporation (CFC) and the Department of Treasury Through this agreement, CFC will pay 30 basis points to cover the cost of the guarantee and fund the cushion of credit program at a level of $52 million for the Rural Economic Development Loan and Grant Program.

11. Storm Damage On July 1, 2005, RUS issued Bulletin 1724D-106, Considerations for Replacing Storm-Damaged Conductors Provides guidelines for RUS borrowers to use during emergency system restorations when an immediate decision is required concerning whether to reinstall downed or damaged conductor or to replace with new conductor immediately after a major storm

12. Electricity Modernization Act of 2005 What does it mean to Co-ops? Co-ops with RUS financing are not subject to regulation under most of the FPA (Dairyland Exemption) Exempts small co-ops (less than 4 M MWH) even if they have no RUS financing Protects distribution facilities from FERC-lite Provides FERC cannot order RUS borrowers to join RTOs

14. Clean Energy Bonds Available for 2 years beginning 1/1/06 Cap of $800 million over 2 years Secretary of Treasury will allocate the bonds No less than $300 million is reserved for electric cooperatives

15. Clean Energy Bonds Qualifying projects include: Wind Biomass Geothermal Solar Municipal solid waste Small irrigation hydro power Hydropower

17. Dissolution of the Rural Telephone Bank The President�s Fiscal Year 2006 Budget proposes to establish the process and terms to implement a dissolution of the RTB due to insufficient demand for the bank�s loans and the availability of adequate financing from other sources. Stockholders of the RTB will receive cash payout for their stock at par value.

20. Broadband Loan Program: FY2005 Budget 4% Funding: $46 Million Treasury Rate Funding: $2.032 Billion Guaranteed Funding: $79 Million $556 Million � 2 Year Funds: FY 2006 $1.601 Billion � Good through FY 2007

21. Broadband Program: Statistics 147 Applications Received Totaling $2,059,000,000 Applications Processed as of September 1, 2005 46 Approved $763,000,000 14 In Review $204,000,000 87 Returned 1,092,000,000

22. Broadband Loan Program: Type of Entity

23. Broadband Loan Program: Technologies HFC is Hybrid Fiber Coax HFC is Hybrid Fiber Coax

24. Broadband over Power Lines (BPL) 1st RUS loan - $19,276,000 International Broadband Electric Communications, Inc. (IBEC) Approved July, 2005

25. Broadband over Power Lines (BPL) IBEC is partnering with: Cullman Electric Cooperative Central Virginia Electric Cooperative South Central Indiana Rural Electric Membership Cooperative

26. Broadband over Power Lines (BPL) Purpose of the loan is to expand the BPL network from the market pilot program (field trials) to the entire service area of each utilities� system. Overall 103,753 households (total number served by the three utilities) and 2,616 businesses will be passed.

27. Broadband over Power Lines (BPL) Service will be provided in: Alabama � 2 counties Indiana - 4 counties Virginia - 11 counties Many of these areas have no broadband service available All towns in the service area have less than 20,000 in population (based on US census data

28. Broadband Loan Program: Why applications are returned! Insufficient credit support Insufficient market survey Technology does not meet requirements Cannot meet minimum financial requirements Incomplete application These are the main reasons applications are being returned. Credit support is the biggest reason with the market survey being second. Latter on in the presentation this items will be further discussed.These are the main reasons applications are being returned. Credit support is the biggest reason with the market survey being second. Latter on in the presentation this items will be further discussed.

29. HTS is Hurricane/Tropical Storm HTS is Hurricane/Tropical Storm

30. Accounting Issues

31. FIN 47 Accounting for Conditional Asset Retirement Obligations An Interpretation of FASB Statement 143 Issued March 2005

32. FIN 47 Reiterates that an entity must record the ARO at the time the liability is incurred FIN 47 specifically addresses accounting for conditional AROs AROs are conditional when Timing and/or Method of settlement are conditional

33. FIN 47 COR is not always an ARO Example #1 � Disposal of treated pole is separate from COR ARO is capitalized/COR per GAAP is a period expense FASB still leaves open the matching of COR to users of asset

34. FIN 47 RUS, FERC & FCC have addressed matching Non-legal COR should be included in depreciation expense Systematically and rationally allocated over the life of the plant

35. FIN 47 If ARO will be at indeterminate time FIN 47 Example #4 allows for not recognizing an ARO if insufficient information is available to estimate the FV of the liability

36. FIN 47 We�ve had questions as to applicability to transmission plant: The company needs to determine if ARO exists Generally, ARO only exists on final removal of plant and this would be remote If there are conditions as to timing or method, these conditions will be considered in valuing the ARO

37. FIN 47 RUS believes transmission plant should be studied by itself Not required to be associated with specific generating plant RTO/ISO give independence to transmission plant Just as likely the transmission plant could be associated with distribution plant

38. FIN 47 There will be interim replacements and COR Those non-legal interim COR will be included in depreciation expense

39. Business Combinations Exposure Draft issued June 30, 2005, a replacement for FASB Statement No. 141. For mergers of mutual entities, the acquirer shall recognize as a direct addition to capital or equity, an amount equal to the fair value of the acquiree. For regulated enterprises, the fair value is equal to net book value.

40. FERC NOPR on RTO/ISO FERC issued NOPR on accounting requirements for public utilities including RTOs NRECA filed comments on behalf of the Cooperative community Objected to the requirement that settlements be reported on a net basis Requests a method of recording Non-RTO activities separately

41. Other Issues

42. Vacancies Needed in Fall, 2005, Field Accountant for Idaho, Washington & Alaska Accounting Branch Chief, Washington, DC Senior Staff Accountant, Washington, DC